How will a poor Credit Score affect the interest?

So you are in need of a loan. Perhaps you would like the loan now but can wait before in case you need to raise your credit score by a few points.

If you are wondering how much you can save if you raise your credit score, the answer is slightly complicated.


Understanding Interest Based on Credit Scores
Each bank decides the amount of interest they expect you to pay on their own, so no formula is exact. While a perfect credit score may get you 5% in one location, it may be 6% in another location based on the costs to the bank, past risk, defaulted loans, etc. Therefore, it is impossible to know exactly what your interest rate will be without applying for the loan, which is why is used to compare various loan options.

However, you can give rough estimations towards how much your interest rate for your loan is affected by your credit score.

Say you are applying for a secured loan for roughly £40,000, you have a credit score of 680 and you receive an interest rate option of approximately 6.375%. At that rate, over a period of 10 years, you will pay approximately £14,210 in interest over the course of the loan. However, if your credit score is, say, 700, your interest rate may drop by a small amount. Most likely it will be about a 6.25% interest rate or around that number.

With that .125% drop in interest rate comes a small drop in monthly payments as well as total payments over the course of the loan. With a £40,000 at 6.25%, your total interest paid will be £13,894. That is a difference of over £300 simply because your credit score was a little bit higher. That small drop in percentage (.125%) equaled a savings of 300 pounds.

This is why credit score is so important. You may not notice 300 pounds in monthly payments, but having that extra in your after the 10 years is going to make a difference. And that was with a change iny your credit score of only 20 points. Having a credit score of 500 and raising it to as high as 700 represents possibly 2 or 3 full percentage points, with each full percentage point making a tremendous difference in how much you will pay over the course of your loan.

This is why it is important to both:
Compare Loans
Keep your credit score high

Comparing loans helps ensure you are getting the lowest interest rate at the time, when clearly the .125% makes a large difference. And keeping your credit score high means that you will have a lower interest rate, which means a lot of savings over time.


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